JORDAN HIKES CONSUMER FUEL PRICES

C O N F I D E N T I A L AMMAN 002717

SIPDIS

E.O. 12958: DECL: 05/07/2008
TAGS: EFIN JO
SUBJECT: JORDAN HIKES CONSUMER FUEL PRICES

REF: AMMAN 2569

Classified By: Ambassador Edward W. Gnehm. Reasons 1.5 (b) and (d)


1. (C) Summary. The GOJ raised prices of oil derivatives
and by-products an average of four to eight per cent
effective May 7, 2003. Finance Minister Marto and other
senior officials confirmed publicly and privately that this
was the first installment in a plan to raise consumer prices
of petroleum products to world levels -- exactly as agreed
with the United States last year. Initial public reaction to
the decision has been muted. End Summary.


2. (u) The Cabinet decided on May 6 to raise consumer
prices of virtually all oil derivatives and by-products
effective May 7. Price increases include:

-- Cooking gas cylinders up from $3.53 to $4.23
-- Gallon of regular petrol from $1.47 to $1.60
-- Gallon of first-grade petrol (super) from $1.97 to $2.13
-- Gallon of unleaded petrol from $2.27 to 2.40
-- Gallon of kerosene and diesel from $0.64 to $0.69
-- Metric Tons of fuel oil used in industries will rise
from $108.57 to $115.62


3. (u) Finance Minister Michel Marto told the press that
the government took the new measures "because all aid to the
Kingdom from the United States, Japan, and the European Union
is contingent on implementing our agreement with the
International Monetary Fund (IMF) calling for the completion
of reforms which started in Jordan in the past years." He
added that when the government prepared the 2003 state budget
it calculated the world market price for oil at $26/barrel,
but in the past four months Jordan had to pay as much as $30
per barrel.


4. (u) Reiterating points made by Prime Minister Abu Ragheb
to the press last week (ref),Marto said that this was the
first of a series of price increases that would eliminate
subsidies on oil products. He said, for instance, that a
cylinder of gas costs at least $4.94 to produce. With annual
sales of 24 million cylinders of gas in the Kingdom, this
means an annual loss of about $35.25 million to the treasury.
Marto was quoted in al-Rai, the leading Arabic daily, as
saying, "The government will gradually increase prices of oil
products so that in three years time there will be no more
subsidies."


5. (c) In a May 7 meeting with ECON/C and a visiting U.S.
Treasury team examining Iraqi accounts in Jordan, Marto
elaborated that the Government's decision had been cleared by
the King. He confirmed that it was the first step in the
plan described to the United States in November 2002 to raise
consumer prices of petroleum taxes to international levels
(including an appropriate tax) over a three-year period. He
said this initial increase would generate additional revenues
of JD 4.5 million per month ($55 million/year). Additional
increases would follow the schedule given to the United
States. Marto said that when he told the IMF mission chief
about the price increases on May 6, the staffer praised the
decision as further evidence of Jordan's ability to deliver
on its commitments and meet its IMF targets.


6. (sbu) In addition to the oil products price increase,
the cabinet authorized an increase from 2 to 4% in the
General Sales Tax (GST) rate applied to food and other basic
commodities. The cabinet also approved imposition of a 5%
tax on interest income earned on bank accounts, which had
previously been tax-exempt. Marto said this rate would be
raised to the income tax rate over time.


7. (C) Comment: Synchronized with the price increases, the
Public Transport Regulatory Commission raised fare schedules
for public transportation vehicles using diesel and petrol
fuel. This is the fifth such increase in consumer prices
over the past three years. Marto predicted grumbling, but
acceptance by the public, particularly in the context of the
economic fallout on Jordan of the war in Iraq. So far, we
have seen no negative blow-back from the decision on the
streets or in the press, though there was a run on filling
stations overnight that led to long waiting lines throughout
the city.


8. (C) In post's considered opinion, the commitment Jordan
made in November to raise oil product prices to world levels
is solid. In addition to the public statements of the
government's intention, this is a policy of the King that
will not change when governments or ministers change.
Planning Minister Awadallah, an economic policy confidant of
the King, also told ECON/C on May 5 that the King is
completely on board with the policy of eliminating fiscal
distortions, including Jordan's historical dependence on
cheap oil, and will ensure that this policy is implemented.
GNEHM